Coffee

In the process, Tim Hortons may be on its way to transitioning from being a high-growth company to one that returns excess cash to shareholders. The company’s shares have softened about 14 per cent from a peak of nearly $58 last spring, reflecting worries about sluggish same-store sales growth and rising competition.

Tim Hortons‘ future could be one of slower growth, with a focus on returning cash to shareholders rather than one of expansion, Peter Sklar, retail analyst at BMO Nesbitt Burns, wrote in a research note this week. “This transition period will likely cause a substantial recycling of the stock, limiting the potential for meaningful stock price appreciation until this process has been completed.”

Tim Hortons has to contend not only with the uncertainty created by the corporate office shakeup and a prolonged search for a new CEO, but also with its franchisees’ concerns over pinched profits. “There is a lot of discontent in the system,” said Ron Joyce, co-founder of Tim Hortons who left the company 12 years ago but still has friends and relatives among the franchisees. “For the profitability of the store owners, it’s not nearly as profitable as it was when I was there.”

(The discontent has spilled over into the courts as Mr. Joyce’s cousin, Arch Jollymore and his wife Anne – he is a former senior Tim Hortons executive and both are long-time franchisees in Burlington, Ont. – wage a so-far unsuccessful fight through two levels of court to launch a $2-billion class-action lawsuit against Tim Hortons over its decision in in the early 2000s to introduce its “Always Fresh” flash-freezing baking, rather than baking from scratch. The Jollymores, who this month sought leave to appeal at the Supreme Court of Canada, argue that the company is unfairly ringing up profits at the expense of franchisees.)

Coffee-serving restaurants are racing to entice customers – and keep them lingering and spending – with lucrative specialty brews, free Wifi and discounting in an increasingly crowded field.

The reason for the jockeying for customers is evident: Coffee is the single top item that is being purchased in restaurants, NPD says. As a result, restaurateurs from McDonald’s to Subway and Starbucks Canada are beefing up their breakfast menus to lure more people to their cafés. About 60 per cent of customers who purchase coffee buy another menu item as well, McDonald’s research has found.

Fast-food players feel the pressure to steal business from rivals in the morning because restaurant traffic gains at that time of day are outpacing those at eateries over all, NDP data show: Fast-food morning traffic grew 3 per cent in the year to the end of November, while total traffic rose by just 2 per cent.

Tim Hortons, which has suffered traffic declines in the past four quarters at outlets open a year or more – a key retail barometer – is beefing up its lunchtime menu to counter McDonald’s attack on coffee and morning meals.

“What we did five years ago is put together a concerted effort to improve our focus on coffee,” said Mr. Betts at McDonald’s, holding up his medium-sized morning cup of 2 per cent latte. “In Canada, if you don’t play in this game, you’re not playing.”

McDonald’s has “rewritten the rules in the last number of years,” Mr. Carter of NPD added. “The menu innovation is just off the charts. They’re going hard after the morning meals.”

It’s pouring $1-billion into refurbishing its Canadian restaurants, adding its McCafé coffee menu to stores and updating their look. Tim Hortons is following suit, stepping up its renovation efforts this year by doubling the number of stores being remodelled to 300, chief financial officer Cynthia Devine said.

Tim Hortons also plans to open 160 to 180 new restaurants, boosting its capital spending to between $250-million and $300-million, up from less than $200-million in 2012.

But franchisees have to be prodded to make their own investment because their contracts only require renovations every 10 years. The company usually is responsible for building costs while franchisees take on equipment-related expenses. “That’s still going to take some time to work renovations through the entire system.,” Ms. Devine said. In the meantime, Tim Hortons is enhancing its drive-throughs, such as double lanes, to reduce lineups and prevent impatient customers from fleeing to rivals.

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